Hard Insurance Market Not Entirely Due to Pandemic

 - June 1, 2021, 9:00 AM
Tornado damage in Monroe, Louisiana, caused extensive damage to aircraft, part of the reason insurance rates have climbed.

While the continuing global pandemic has certainly contributed to the ever-hardening aviation insurance market, the seemingly exponential rise in rates in the late 2020 and early 2021 renewal seasons can be further attributed to other factors. Among them: the rise in reinsurance market rates due to underwriters’ decreased appetite for high-risk, high-liability operations; and the need for the market to replenish coffers after several years of catastrophic claims, both within and outside aviation.

With the number of aircraft and flight hours flown significantly reduced because of the pandemic, one might have surmised that 2020 would have been a profitable year for the aviation insurance industry. But several factors turned 2020 into another loss for the business as claims from weather events, ground collisions, and previous accidents outstripped the reduced premiums collected as most of the airline fleet remained grounded.

According to data published by travel data analyst Cirium in December 2020, the global airline industry flew about half as many flights in 2020 (16.8 million) as in 2019 (33.2 million). The reduced airline activity brought about by the global pandemic had a twofold impact on aviation insurance. First, since airline premiums are generally assessed according to hours flown, the global aviation premiums collected were down by an estimated 25 percent compared with 2019 numbers. Covid-related business closures have reduced the aviation premium base even further.

Second, while aircraft and crews were sitting, claims continued to occur from weather and ground collision damage. In addition to individual incidents of hail and wind damage to sitting aircraft, airports in five U.S. states suffered direct tornado hits in spring 2020, causing upwards of $125 million in insured damage. A marked increase in hangar rash and other ground incidents as crews returned to work after a long hiatus generated millions of dollars in repair claims as the price of parts and labor rose during the pandemic.

Also, though there were fewer flights in 2020, more fatal airline losses occurred in that year (eight accidents resulting in 315 fatalities) than in 2019 (21 accidents resulting in 257 fatalities), according to the Flight Safety Foundation. High-profile accidents such as the January 2020 helicopter crash that killed nine people including basketball star Kobe Bryant and the midair collision of two small aircraft that killed eight people in July 2020 added to the loss record.  

The year also saw the fallout from the Boeing 737 Max accidents, as claims from the loss of two airline hulls and hundreds of lives, plus worldwide grounding of the airframe by governmental bodies, have reportedly topped $2 billion. The annual worldwide aviation collected premium in 2019 was just under $2 billion, meaning the 737 Max crashes will likely wipe out an entire year’s worth of worldwide aviation premiums over time as claims are paid.

Reinsurance Woes

Due to high hull values and high liability limits associated with aviation insurance policies, most insurance carriers must themselves purchase insurance (called reinsurance) to help spread the risk, preventing any one claim from bankrupting a company. The reinsurance market, which also covers property and casualty insurance, life and health, worker’s compensation, and other industries, took a beating during 2020 due to natural catastrophes such as Hurricane Laura, which itself caused an estimated $10 billion insured loss.

According to "Willis Re 1st View: The Perils of Unmodeled," a reinsurance report published April 1, insured natural catastrophe losses totaled $78 billion in 2020, up $25 billion from 2019 and 17 percent above the average annual loss over the last 10 years. A January 2021 report from reinsurer Aon reported an estimated $97 billion in insured losses due to natural catastrophes, or 40 percent above the 21st-century average.

S&P Global Ratings' Global Reinsurance Highlights 2020, published in May 2020, indicated that Covid-19 losses eroded the buffer of many reinsurers and predicted: “If 2020 catastrophe losses reach the level reinsurers have budgeted for, we expect at least eight of them to suffer a capital event.” A chart published in that report indicated an industry loss of $75 billion-plus Covid-19 losses would result in the catastrophe budget and prospective earnings being insufficient to cover the total loss, affecting as many as 15 reinsurers.

The tragic crash that killed Kobe Bryant
The tragic crash that killed Kobe Bryant, his daughter, and seven others in January 2020 was one of several losses that contributed to recent insurance rate increases.

Reinsurance Effect on Aviation

In an attempt to refill empty coffers, reinsurers increased their rates in 2020. While worldwide reinsurance rate increases in the property and casualty markets ranged between 5 and 30 percent, aerospace reinsurance rates increased a minimum of 25 percent for insureds who were loss-free and as much as 250 percent for certain insureds who had previous loss history, according to various sources.

The higher cost of reinsurance meant insurance carriers were forced to increase their rates as well, and underwriters began tightening up liability limits, reducing coverages, and scrutinizing operations.

“For existing policies, there's a much stronger mindset of driving toward an adequate rate for the risk class, as well as managing the exposure,” said Wesley Collier, senior vice president and light aircraft product line manager for Old Republic Insurance Group. “Each risk is evaluated based on its own individual risk factors. While make and model flight experience probably remains ‘king’ among all factors for getting an underwriter comfortable with a pilot, many other factors weigh in on the decision to accept a risk, and ultimately the rate generated...Obviously, clean accounts with fewer elevated risk factors will have more options in the marketplace.”

The worst hit may be small single-ship and single-pilot aircraft operators; the ones who made it through the pandemic squeeze are now finding themselves in an insurance conundrum where rate increases can reduce profitability to the point of nonexistence.

The "USI 2020-2021 Commercial Property & Casualty Market Outlook" noted that for owner-flown aircraft higher liability limits are scarce, pilot age and training are being scrutinized more heavily, and premium increases are in the high double digits— between 50 and 100 percent. Single-pilot charter operations are under intense underwriting scrutiny and limits have been drastically reduced. Rotorcraft operators have been particularly hard hit with rate increases of 50 to 150 percent, depending on loss history. Large fleets of both fixed- and rotary-winged aircraft with a history of losses are requiring layered insurance programs where multiple insurers each assume a portion of the risk.

David Merker, region manager of aerospace in North America for Willis Towers Watson, says that pilots and operators can improve their rate situation through various safety-related initiatives, including participating in the FAA Wings program, increasing make and model time, and engaging in simulator-based training. “Anything you can do to improve your proficiency as a pilot, especially relative to the aircraft you’re insured in, will factor favorably into your rates,” Merker said. “There are a lot of programs offered through the insurers themselves, or they provide preferred vendor access to upset prevention and recovery training or safety management system assistance. Attaining a higher pilot rating is also always favorable. It shows your dedication to the aircraft platform and your proficiency in flying that aircraft.”